Summary:

VSNL, a Tata Group company buying Tyco Global Network for $130 million has received the scrutiny of previous high profile buyouts such as Singapore Telemedia snapping up Global Crossing for $250 million or Reliance Infocomm buying FLAG Telecom for $211 million. (In case you are interested, […]

VSNL, a Tata Group company buying Tyco Global Network for $130 million has received the scrutiny of previous high profile buyouts such as Singapore Telemedia snapping up Global Crossing for $250 million or Reliance Infocomm buying FLAG Telecom for $211 million. (In case you are interested, I reported this news earlier this summer!) The $130 million purchase price for TGN translates to roughly 5 cents on the dollar, which is on par with the approximately 6 cents on the dollar that Reliance paid for FLAG, according to Telegeography.

“Even though VSNL has acquired TGN for pennies on the dollar, the cost of operating and maintaining a global submarine network is significant,” according to TeleGeography Research analyst Alan Mauldin. “VSNL is taking a long-term view in this acquisition, since there’s currently little profit to be made in the hyper-competitive subsea capacity market.” I personally am very worried about the pesky-costs involved with running this network, and of course the hyper-competitive transatlantic market. However, TeleGeography data reveals that average Internet traffic across the Atlantic and Pacific both grew over 100 percent in 2004, indicating strong demand exists. What is ironic is that VSNL has now become a big daddy in the Indian bandwidth bazaar. It owns a big portion of SeMeWe2 cable, another major conduit connecting India with rest of Asia.

Daniel Berninger, an analyst with Minneapolis-based Tier 1 Research, told Associated Press that non-US companies are likely to be big buyers of these non-performing assets. “I think it’s the beginning of a trend,” he said. “There is a fair amount of assets sitting out there, and the U.S. demand for this capacity is pretty low.”

Still it is an important deal from two perspectives: first emergence of India as a major telecom hub, and secondly the growing traffic between India and US, largely because of outsourcing of software and other services. TGN is one of the busiest carrier routers in the transpacific region and present accounts for about 44% of the total trans-Pacific capacity. TeleGeography’s International Bandwidth research service indicated that the Tyco cable has the ability to upgrade its capacity to potentially account for 79 percent of trans-Pacific capacity, especially important because a lot of traffic between India and US is going to flow over this pipe.

This gives us immediate access to a global network so we are in a position to sell to customers who are global,” said Srinath Narasimhan, the director of operations at VSNL told The New York Times. Indian demand for bandwidth is growing by 80% per annum, and with the new Broadband policy in place, is only likely to increase. Tata Tele itself is getting aggressive in rolling out consumer broadband services.

For VSNL-Tata, this is a final piece of the puzzle in building an end-to-end network, which admittedly is not as influential as the Reliance Infocomm. Tata has local loops, and wireless businesses in India. It has been a primary long distance carrier for India, but has been losing ground to Reliance and Bharti, another Indian telecom powerhouse. It needed a major international pipe to stay price competitive with these rivals. (I thought, leasing capacity on global lines was a better way to go, but Indians obviously are happy to pay and own the pipes.)

I think most of the news outlets have missed the critical and most important aspect of this deal: the inbound voice traffic. Reliance Infocomm has made a tidy business out of luring overseas Indians to its service by offering them really low call rates to India. Reliance is leveraging FLAG and offering its wireless users really low call rates to overseas destinations like US and UK. It is one way to lure new subscribers to its wireless network. (And this is a very lucrative market – ask AT&T and MCI which have for years made hay by selling expensive minutes to overseas Indians.) I suspect, VSNL is going to pull an exact same move. Which is good for the consumer, though I suspect mom will be calling me more often. Now if someone could explain to her that we are about 13 hours behind on time here in San Francisco.

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