Interview: Srinath Narasimhan of Tata Communications

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CEO Srinath Narasimhan is re-investing the cash from that wholesale voice in wireless networks and value-added services in India and other emerging markets

Tata plans investment in WiMax and cloud with cash generated by wholesale voice

Srinath Narasimhan: our origins are in an emerging market,
and emerging markets present a good opportunity

Few people ever have the opportunity to take control of a company and reinvent it — but that’s just what Srinath Narasimhan has done with Tata Communications in the past eight years.

Now, the managing director and CEO is ready to push the company into a bold new investment in WiMax-based broadband services in India, so long as he can win the appropriate licences from the government. Tata already has a broadly similar operation in South Africa, Neotel, and Srinath is looking for other opportunities.

At the same time the company is investing in cloud services and expects to try them out in “a couple of locations … within the year”, followed by a global launch.

Back in 2002 the company was not Tata Communications, though it had already been controlled by the massive Tata industrial group for two years, since the Indian government privatised its international telecoms monopoly VSNL.

“Six weeks after Tata bought it, the market opened up,” recalls Srinath now. “The challenge was to reinvent our business model.”

And that’s what he and his colleagues in the old VSNL have done: though the new name was not adopted until 2008, by which time the company had already changed hugely from the old monopoly provider. Though the group has a controlling stake in Tata Communications, shares in the telecoms operator are also sold on the Mumbai and New York stock exchanges. The company is capitalised at $1.79 billion.

“In the monopoly days, long distance pricing in India was high, in order to subsidise local phone services,” says Srinath. VSNL’s new competitors didn’t have to subsidise the fixed local operators, so could undercut it. “We had to move from one model to a completely different one. In the first year there was a 60% price drop.”

Today, Tata Communications has three significant operations — only one of which is in India. The other two are global.

“We have an international wholesale voice business,” says Srinath. “We are one of the market leaders, with 32 billion minutes of traffic a year, 14% of the market.”

Then there is a global business carrying data for enterprises and other carriers, along with a range of co-location and hosting services. “We have a large market in India and we are trying to leverage that to achieve a strong position globally — but we’re not quite there yet.”

And then there are the WiMax plans in India — “They depend on the availability of spectrum,” says Srinath — plus existing local-network investments in Nepal, Sri Lanka and particularly South Africa, as well as others that may happen in the future.

Alternative home markets

He views these markets outside India as alternative home markets for Tata Communications. “India was still small compared with the US and the UK markets, so we needed second and third home markets,” he says. Neotel — the second South Africa national operator, competitor to Telkom — is 56% owned by the Tata group, with 49% of the whole stake in the hands of the unit Srinath leads.

His global strategy has been to build up wholesale voice services, as a huge generator of cash, and data “which is profitable but does not generate cash”, and then invest in high-growth areas and in start-ups — such as Neotel, content distribution, telepresence and areas yet to be disclosed.

Funds come from the 142-year-old Tata group, the largest privately held company in India, with annual revenues estimated at $72 billion. Businesses include carmaker Jaguar Land Rover, steelmaker Corus, Brunner Mond chemicals and Tetley Tea. In March 2009 the company launched the Tata Nano, a car 3.1 metres long that sells at 100,000 rupees — $2,200 — in its cheapest form and does 26 kilometres for each litre of fuel.

So the group is used to challenges. Srinath himself — a mechanical engineer by training — had been helping to steer the group towards IT and telecommunications since the early 1990s. In 2000 he was CEO of Tata Internet Services and two years later became director of operations at VSNL.

“The first challenge was the future was going to be like in five years’ time. Then we had to create a platform and create and organisation, putting the building blocks in place.”

“We had the preserve our existing business, retaining our customers while rebuilding the business.”

Some companies in this position have looked to the revenue that can be made from mobile — but that option was not available to Srinath and his colleagues, as Tata already had a mobile business in the group.

“So we decided to invest in enterprise services and the international market,” says Srinath. A series of acquisitions brought in the Tyco Global Network for $130 million in November 2004. “Tyco brought us submarine cable capacity across many parts of the world,” says Srinath. “That changed us from being India-centric to global.

A year later the company added the North American provider Teleglobe for $239 million. “Teleglobe was very strong in wholesale services and in IP data and voice.”

In addition the company invested “almost $2 billion in organic growth”, including further submarine cable systems, data centres, and services including MPLS and ethernet. “We built capacity around managed services on the enterprise side.”

Since then, Tata’s business in wholesale voice has done well. “We have an integrated offering for the wholesale market and we’ve extended those by turnkey solutions,” says Srinath. In 2009 the company announced a deal to share resources with BT Global Services. Tata would become BT’s main supplier of voice termination outside BT’s own footprint, and BT would be Tata’s main distribution channel in the UK.

Since then, Tata Communications has done two similar deals, but Srinath would not name the companies, and he expects more.

Where does this leave the company, after a decade under Tata’s control? “We are the market leader in India for voice and enterprise services, but we need to continue to invest in access. However, the last mile in India has not been unbundled.”

WiMax investment

Rival operators are all laying fibre. “We have a robust intercity infrastructure and we have fibre in the top 30 cities.” Tata has supplemented access with fixed WiMax. “We have some spectrum in 150 cities. We use it for enterprise, SMEs and retail.” But there is “not enough spectrum” for the business and Tata plans to bid in India’s auction, expected to start in April 2010.

That will help develop Tata’s business in its primary home market — but, as Srinath has already said, he wants the company to have a number of home markets. “We are an emerging market company. Our origins are in an emerging market, and emerging markets present a good opportunity.”

Neotel in South Africa is one such case, where the company is “now part of the larger Tata Communications story”. The model is similar to the Indian business: enterprise and SMEs, no mobile, and fixed wireless for access.

“We continue to look at other countries where we can have home markets,” says Srinath, but Tata looks first at what infrastructure it has reaching those places. “The investment should generate synergies with our existing business.”

Tata expects Neotel to be profitable in its own right, but there will be synergies when Tata’s customers want connections and services into South Africa.

Which other countries is he looking at? Asia and Africa, is all he will say. “We have a shortlist and we’re still evaluating it. The key to opening up a market is the ability to connect it with bandwidth. We’ll start with an investment in wholesale, and then move into other services.”

So it may or may not be significant that Tata now has a point of presence in Kenya, one of the landing points of the new broadband Seacom cable — in which Tata and Neotel are partners. Other countries that Srinath mentions are Vietnam and the Philippines.

Tata is now one of the largest operators of submarine capacity, with its own cables and interests in a number of consortium cables. “Cashflow from the wholesale market funds our infrastructure. The infrastructure gives me capacity to develop managed services for the market.”

Cloud services plans

Managed services — and particularly cloud services — are Tata’s next area of investment, he says. “For cloud services people need good quality of service and low latency, and we now have more than 40 data centres. We have the basic building blocks. We are validating services in a couple of locations” for launch “within the year”, he adds. Ultimately the service will be global, targeted at “multinational companies with interests in multiple regions and a specific interest in emerging markets”, says Srinath. These will be targeted “as prime prospects”.

At the same time Tata is close to completing the transformation of its wholesale voice network to all-IP. “We’ll complete transformation in 2010, but the challenge in voice is that we have to look at ways to improve the margin.” It’s under 10% now, he says.

As a result of low margins, operators are consolidating. The 2009 deal between Tata and BT is a sign of that. KPN’s purchase of the shares in iBasis it did not already own — completed in late December 2009 — is another. “This is a very low margin, high volume business,” says Srinath. Success needs a lot of management effort: “ A couple of bad deals and you lose your margin.” But management “is something we do very well”, he adds. Tata Communications has no retail customers, but has “relations with 1,600 carriers round the world”, and focuses on them, he notes.

But low margins are low margins, and that’s why Srinath and his colleagues are aiming to develop value-added services for Tata’s wholesale customers in a number of sectors: banking and financial services, “initially in India, but we might expand”, and media and entertainment “which is a global play”.

Movie distribution

Tata is investing in content distribution networks, in India but also in Europe. In January 2010 the company bought BT Mosaic platform, which is designed to manage content and workflow from production to distribution. Following the deal — worth $500,000 according to the Tata group website — BT will support its media customers with a sales channel agreement for Mosaic.

Vinod Kumar, the president and COO of Tata Communications, said at the time of the deal that the acquisition would strengthen its “global media and entertainment portfolio with powerful cloud-based digital media management applications that can be accessed over the web”. Mosaic’s digital media management capabilities will be integrated with Tata’s global network infrastructure and manage services portfolio, he added. “We are now able to create a unique platform that can take care of content workflow from production to distribution across the world.”

The deal will give Tata a presence in the BT Tower in central London, the hub of BT’s broadcast distribution network.

“It’s a platform that enables people with digital content to distribute it in various forms,” says Srinath. “Say you create a movie today. You can take clips and distribute them on broadband. This is a relatively new product.”

On the enterprise side, Tata is investing heavily in the new service called telepresence — essentially high-definition video conferencing with hifi audio. Cisco dominates the equipment market, and most telepresence networks so far are for internal use of multinational companies, but Tata has installed bookable meeting rooms around the world — including, with Neotel, in South Africa.

“We use telepresence extensively in Tata,” said Srinath. The company’s voice team is based in Canada; data is in Singapore; network engineering is in the US; and customer service is India. “We find the best people where we can, but we have to create the management processes. The management team is global.”

Tata Communications as a whole employs 6,400 people, he adds, of whom 5,000 have joined since the transformation started in 2002. “We have more than 40 nationalities, and the average age is 35.” Tata’s transformation has been spectacular, but it has probably only just started. GTB

Srinath Narasimhan

Managing director and CEO of Tata Communications — formerly VSNL — part of the Tata Group

Degree in mechanical engineering from the Indian Institute of Technology, Chennai

MBA from the Indian Institute of Management, Kolkata, specialising in marketing and systems

Until 1992 was executive assistant to the chairman of Tata Industries

Worked with a strategic team to set up Tata Information Systems, which later became Tata IBM, with assignments in sales and marketing

In 1998 returned to Tata Industries as general manager for projects at Tata Teleservices

Moved to Hyderabad in 1999 as chief operating officer responsible for all the operations of Tata Teleservices

2000-02, CEO of Tata Internet Services

2002, became director of operations of VSNL, and then executive director