Here is a formula for failure: enter a business late, don't operate in the most lucrative markets, spend frugally on advertising and-on top of all that-have a public-sector tag. The Rs 26,000-crore Bharat Sanchar Nigam Ltd (BSNL) has just turned this formula into a prescription for a blazing success.

The fable of the slow and steady tortoise beating the fast but fickle hare is being played out in the cellular industry. While the telecom industry was focused on the ongoing battle between mobile services and limited mobility, the state-owned BSNL has stolen a march over other cellular companies and emerged as the second biggest player in the industry. Launched in October 2002, BSNL's CellOne mobile service has got more than 22 lakh subscribers. The company does not operate in Delhi and Mumbai, two of India's biggest cellular circles.

TOWERING AMBITIONS: CellOne is already operational in 1,100 towns and cities and Prithipal Singh expects to add another 200 locations and 10 lakh customers in 2003-4

BSNL's emergence as a serious contender for the top slot in mobile services has given the industry a jolt. Nobody expected a PSU to get its act together and overtake private-sector players in such a short time, especially when it was among the last to enter the fray. Says Kobita Desai, principal analyst, telecom, Gartner India: "Distracted by the limited mobility row, cellular operators did not fully factor in the competitive impact of BSNL's entry." In March alone BSNL added six lakh customers, which was almost three times the combined figure of the rest of new subscribers for the industry. Boasts BSNL Chairman and Managing Director Prithipal Singh: "We will be the only true mobile service providers with an always-on network across the country."

The swift rise of the PSU telecom company is rooted in its three-pronged strategy-leverage its gargantuan geographical reach and customer base of 35.4 million landline subscribers, lower the entry costs and offer cheaper call rates. As a masterstroke, it has exempted its 35.4 million landline subscribers from paying the security deposit for a new post-paid cellular connection. Normally, cellular service providers demand a security deposit of up to Rs 2,000 for a subscriber connection. This offer from BSNL has expanded the cellular market significantly. With the security deposit waived, more people are willing to try out the new service. This was made more attractive by its aggressive and popular Plan 325 that offered free incoming from any network in the country.

BSNL's phenomenal reach-from Kerala to Himachal Pradesh and West Bengal to Gujarat-has also helped. The company dared to take the road less travelled to small towns and other not-so-lucrative locations. Spending Rs 4,000 crore on setting up the network, its CellOne service became available in 1,100 cities and towns within six months of its launch. The rest of the cellular services industry has taken eight years to reach 1,545 towns.

A big plus for CellOne is that it offers uninterrupted service on vast stretches, thanks to the location of its signal towers along highways and railway tracks. This allows users to talk uninterrupted while travelling long distances. Recalls Tavishi Srivastava, a Lucknow-based journalist who switched to CellOne in November last year: "While travelling to Delhi by train last month, I was able to talk on my cell phone for a long time without interruption of the service."

While its reach in remote areas gives BSNL a unique edge, its success in cities like Chennai, Bangalore and Ahmedabad was more by default. BSNL's lower tariff was certainly an attraction but some customers switched to CellOne after bitter experiences. Hidden costs and fine print made them feel that private companies were cheating them. Says Anil Jain, deputy director-general, marketing, BSNL: "With everything being equal, customers now trust a PSU more than a private player." BSNL's no-frills approach struck the right note. However, BSNL has not poached on the customers of its rivals but created new ones on its own. Nine out of every 10 CellOne customers are new cell-phone users.

There are other factors working in favour of BSNL. The colossal size of its operations mean lower costs. Its network procurement costs per line is only two-thirds that of the industry average. Further, the company finds it easier to expand into a new circle or town because it already has a presence there. As a result, it need not buy real estate for a new office, hire more staff or spend on setting up power back-ups.

BSNL's success has come on the back of minimal advertising. Its Rs 25-crore advertising and marketing budget is minuscule compared with those of private operators.

However, BSNL's rivals have doubts over its ability to sustain the initial success. BSNL has got the numbers but the question is: has it sacrificed too much revenues in the process? By offering very low tariffs, is it feeding on the future? Says the managing director of a telecom company: "This is a long-term business. Don't draw conclusions based on six months' performance." Indeed, BSNL's average revenue per user will be much lower in remote towns than in big cities. Its key challenge will be to boost this revenue per line by offering value-added services. CellOne got so many customers because unlike other companies, it offers free incoming calls from any network. From May 1, all cellular operators will offer free incoming calls, taking away that vital edge from BSNL. Also, the implementation of the Calling Party Pays regime is likely to shave off Rs 400 crore from its bottom line.

On its part, BSNL plans to consolidate its initial gains in the next few months. Having focused on volumes so far, the thrust will now be on value. The company will be spending close to Rs 2,000 crore in 2003-4 to beef up its cellular offerings. In the pipeline are value-added services like mms and international roaming, which will be launched by August. "The bride is all dressed up. She just has to don the ornaments," says Singh jocularly. The expansion too will continue, with BSNL hoping to add 200 cities and towns and around one million new customers this financial year.

More than anything else, BSNL can take credit for expanding the market for cellular services to smaller towns. Telecom analysts are optimistic about CellOne's future. Says Desai: "BSNL's success in cellular services cannot be dismissed as a flash in the pan." Cellular operators better watch out.