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VSNL: Value add services to differentiate…. - Views on News from Equitymaster
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  • Jan 13, 2001

    VSNL: Value add services to differentiate….

    VSNL (Videsh Sanchar Nigam Limited), the state owned telecommunication behemoth, is attempting to transform itself from a state run monopoly to a customer-centric organisation. More importantly, the company has recognised the need to enhance the bandwidth capacity and increase the proportion of value-add services in its turnover.

    VSNL operates the gateway to connect the domestic telecom networks with the foreign networks in coordination with various international carriers. There are two major revenue streams for the company in international telephony. One, it derives revenues from the international carriers for connecting calls, originating abroad, to the Indian telecom network through its gateway. Secondly, it receives a revenue share from the Department of Telecommunications (DoT) for connecting international calls originating from India to the international carriers. International telecom services (telephone, telegraph and telex) are the dominant source of revenue for VSNL, and accounted for 90 percent of the company’s total income in fiscal year 2000. The DoT issued a license to VSNL in 1986 for international telephony, which is valid till April 2004.

    Sales mix
    % of sales FY99 FY00
    Telephone 91.5% 90.2%
    Telex 0.5% 0.4%
    Leased lines 3.6% 4.3%
    Internet 2.5% 3.0%
    Satellite 1.1% 1.1%
    Others 0.8% 1.0%

    The company also entered into a Revenue Sharing Agreement (RSA) with DoT in 1997. As per this agreement, VSNL and DoT share revenues earned from calls originating and terminating in India on the basis that VSNL would pay DoT a charge per minute based on the weighted average ratio of incoming calls less Rs 10. DoT would pay a charge per minute based on the weighted average ratio of outgoing calls plus Rs 10. As this agreement with the DoT terminates in April 2002, VSNL will no longer be insulated from fluctuations in the international tariff structure.

    The company provides other value-add services like leased line services, Internet access, electronic data interchange, video conferencing, television relay and video transmission. Income from value added services has gone up from 5 percent of the turnover in 1997 to 10 percent in fiscal year 2000. For instance, Internet Services has been one of the key contributors to the rapid growth in income from value added services. With just one percent computer penetration (out of which not more than 30 percent are connected to Internet), this business has shown good growth prospects for the company. The company offers Internet services in six cities and plans to increase that to ten in the current year.

    Having understood its potential, the company has launched competitive Internet surfing packages to increase the subscriber base. The result of these initiatives are evident from the fact that income from Internet services has moved up from less than one percent in fiscal year 1998 to 3 percent in 2000. Going forward, revenue from Internet services are expected to touch Rs 5 billion by fiscal year 2003.

    Earlier this year, the Council of Economic Affairs decided to end VSNL’s monopoly in international voice telephony in April 2002 instead of April 2004. However, to compensate the company, the government has proposed a comprehensive package both in monetary as well in non-monetary terms. This includes the grant of domestic long distance telephony (DLD) license and Category ‘A’ Internet Service Provider (ISP) license.

    Besides, the government has also decided to share the international voice telephony revenues with VSNL for a period of three years i.e. 2003 to 2005. It has also plans to route international voice traffic arising from both Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL), the two other state owned telecom companies, through VSNL’s international gateway. The compensation package is estimated to be around Rs 7 billion.

    However, there are some threats as well. The major one being Internet telephony. Internet telephony allows subscribers to talk long distance at the price, which may be only a fraction of conventional calls. Besides the United States Federal Communication Commission has asked the country’s telecom companies to reduce the rate at which international carriers transfer calls between their networks. This would further pressurize margins and slow down in realisations.

    The company has asked the government for a license in providing domestic long distance telephony as well as cellular services (as the fourth cellular service provider) in each of the circles. We believe that value added service would be the only differentiating factor between telecom service providers in the coming years and VSNL. Let us hope they are geared up to meet competition.



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