Author(s): Raghu Gopal
A number two and a number three are in talks to become number one.
After growing speculation, Vodafone India has publicly confirmed that it's in merger talks with rival Idea Cellular. This is a major development for the country's telecom sector that could change its competitive landscape — a combination of the two would create India's largest mobile provider with a total of 390 million subscribers, taking 37 percent of the Indian wireless market. Airtel is currently India's top wireless operator with 260 million customers.
Vodafone has long regarded India as its main growth market but has encountered considerable competitive and regulatory challenges during the past few years.
The ongoing price-war in India forced the operator to write down the value of its Indian unit by €5 billion in November 2016. A long-awaited initial public offering appears to be off the radar for the moment, possibly until market conditions stabilize.
With the roll-out of 4G networks across the country, Vodafone has had to face keen moves from Airtel and Idea. The operator has also been embroiled in a battle with the Indian tax department since 2007 over its acquisition of Hutchison Essar. Furthermore, the Indian government's surprise demonetization of high-value currency notes in November 2016 and the ensuing cash crunch have also hurt Vodafone's bottom line. Cash is still king in India and a dominant form of payment. Over 90 percent of the more than 1 billion mobile phone users have prepaid connections with payment being in cash. The demonetization has curtailed their ability to pay for phone services when cash was needed to purchase daily items.
Like most international markets, India has a keen challenger willing to forego short-term profits to establish a subscriber total: Reliance Jio's launch of 4G services in 2016 is causing waves across the industry. Jio is offering free voice for life as well inexpensive data. In response, operators in India including Airtel and Vodafone have been scrambling to cut rates and offer attractive plans to retain customers.
Reliance Jio has about 70 million subscribers — all LTE — giving it 40 percent of India's 4G market. Although its network is currently available in only a limited number of urban areas, Jio says it intends to cover 90 percent of India's population by 2020. If it can keep picking up subscribers at the same pace as it has, other operators can expect to lose potential high-value 4G customers.
Vodafone India and Idea Cellular are large GSM operators — Vodafone offers 3G as well as 2G and GSM — and both are currently in the process of building out their LTE networks. A merger would provide scale to accelerate the establishment of 4G services. It would not only create the largest wireless operator in India, but also the second-largest operator in the world behind China Mobile, which has about 845 million subscribers.
India's unique mobile penetration rate is about 70 percent according to the GSMA with mobile Internet use at 50 percent and growing.
Vodafone has stressed that a merger is far from certain and even if the two companies come to terms, the deal would have to survive regulatory scrutiny. Furthermore, Vodafone India's plans to list its shares on the local stock exchange will have to be revisited.
Average revenue per user (ARPU) in India, averaging a little under $4, is already among the lowest in the world. An extended price-war would drive revenues and ARPU further down, making large-scale infrastructure investments increasingly difficult to justify. We expect to hear more about the planned merger and the impact of tumbling prices on Vodafone's bottom line in India during its latest trading update on Thursday.