Ambani brothers' telecom agreement a win-win

In 2005, when the two Ambani brothers had split, no one had ever thought the two estranged siblings would collaborate. For corporate India, it seemed like a huge loss. The two brothers even signed a non-compete agreement.

However, with time, Mukesh Ambani and Anil Ambani buried the hatchet. Three years ago, the two brothers scrapped the non-compete agreement between them. And earlier this week, Reliance Industries (RIL) and the Anil Ambani group announced their first business partnership. They also agreed for a comprehensive framework of business cooperation.

The two groups have agreed to share optic fiber cables and other telecom infrastructure including telecommunications towers for their respective ventures, Reliance Jio Infocomm (an RIL subsidiary) and Reliance Communications (RCom) in a 12-billion rupee (US$219 million) deal. The deal also provides RCom with reciprocal access to the infrastructure built by Reliance Jio in the future.

"It's a win-win deal for both the Ambani brothers," Kamlesh Bhatia, research director at Gartner told ZDNet in a phone interview. According to Bhatia, the advantages for Reliance Jio Infocomm would be three-fold:

1. Since Reliance Jio Infocomm would get ready access to infrastructure, it would reduce its time to market (4G services). "The market situation is such that it makes no sense to build parallel infrastructure," Bhatia said. It definitely makes more sense to leverage existing infrastructure.
2. The deal gives Reliance Jio Infocomm the opportunity to roll out its services nation-wide since RCom has a good countrywide network. Incidentally, RCom's fiber network ranks among the top three in India, in addition to competitors like BSNL and Bharti.
3. Through this agreement, Reliance Jio will overcome challenges around 'right of way'. In India, 'right of way' can pose huge problems for setting up infrastructure.

This agreement has also provided some clarity on rollout and launch plans of Reliance Jio Infocomm, the only company to have pan-India fourth generation airwaves. RIL had secured pan-India BWA spectrum for 128.5 billion rupees (US$2.37 billion) back in 2010. It soon acquired 95 percent stake in Infotel Broadband services and even conducted field trials of 4G services in its campus in November 2010. But till date, the company has not launched its 4G services.

In a news report, analysts at Goldman Sachs said they expect RIL to launch its telecom services by the end of calendar year 2013.

According to Bhatia, the advantages for RCom too are multiple. One, such deals could ease some of its financial burden. RCom is hugely in debt. Its gross debt is one of the highest in the country, at 395.6 billion rupees (US$7.2 billion). Its bottomline too is under pressure. RCom's net profit fell 43 percent in the September-December 2012 quarter, while profits for the September-ended quarter were 60 percent lower than a year ago.

While the one-time payment of 12 billion rupees is too small in front of its total debt, it does indicate some impact if RCom earns further revenues from more such agreements. "RCom has been looking at ways to monetize its assets and infrastructure for quite some time now. It has been trying to hive off its towers business," Bhatia said. So this deal could be an important starting point. It increases the possibility for further unlocking of value in the tower and global businesses.

"The deal opens the door for future tie-ups. There can be tie-ups in verticals like finance, entertainment, banking and retail. That could be the next level of engagement between the two brothers," Bhatia added.

Bhatia also has a word of caution for other contenders.

Back in 2003, when RCom was under Mukesh Ambani (prior to the split), the company had introduced 'Monsoon Dhamaka' offer whereby subscribers could get multimedia mobile phone and connection for just 501 rupees (US$9.1). This scheme helped RCom increase its market share drastically.

RIL is a late entrant in the 4G market. Players like Bharti and Tikona have introduced their 4G services and have gained mindshare, if not market share. "With this agreement, one hopes Reliance Jio will make a disruptive impact on the market," Bhatia said.

In fact, some news reports also mention the possibility of a merger between RCom and Reliance Jio in the future. While that looks like a distant possibility today, one only hopes the growing affinity between the two brothers benefits the consumer and has a positive impact on India’s telecom industry.