Author(s): Raghu Gopal
The Indian wireless market offers large volumes, but with low average revenue per user it has generally been unprofitable. Last week's announcement of a merger between Vodafone India and Idea cellular wasn't a surprise — the operators had previously confirmed rumours that they were in talks — nor was it unprecedented. Only a few weeks back, Bharti Airtel, currently India's largest wireless service provider, agreed to buy Telenor's India assets.
Once its merger with Telenor is complete Airtel will have 320 million connections, cementing its market leadership. But this position could be short-lived; the combined entity of Vodafone India and Idea Cellular would leapfrog Airtel with 395 million lines. Consolidation is happening at a record pace.
Telenor and Vodafone were both persuaded by the big numbers of India. It's the world's second-largest market, but it doesn't necessarily offer a smooth path to success. Manoeuvring through India's regulatory and cutthroat competitive environment has become a challenge even for some of the world's most seasoned wireless service providers.
Vodafone has had a rough ride in India ever since it entered the country in 2007 with its acquisition of Hutchison Whampoa's local business for almost $11 billion. The deal also pitted Vodafone into an ongoing legal dispute with Indian authorities, which are demanding nearly $2 billion in taxes.
Reliance Jio's entry into the telecom landscape and the subsequent price-war prompted Vodafone to write down the value of its Indian business by $5.5 billion in late 2016, pushing Vodafone into the red at the end of last year. Reliance Jio's launch also put pressure on Vodafone to inject $7.1 billion into its local unit to repay debt, purchase spectrum, expand its network and deploy new technologies.
Vodafone's investors have been pushing for greater clarity about the company's strategy in India, where it has not been cash-flow positive after years of operations. Having poured billions of dollars into the Indian market, major questions now hang over the future direction of the combined entity. At present, it's not clear whether the Vodafone brand will be retained, and there has been no announcement as to who will be the CEO of the new entity. It's likely that Vodafone will crave significant input into direction and strategy, but the mechanics of the partnership with Idea Cellular are still unclear and may remain so for some time.
The current market situation in India is clearly unsustainable, particularly with Reliance Jio's relentless pricing tactics (see Reliance Jio Crosses a Mega Milestone). This could be a sign of things to come for Vodafone in the country. The operator has a track record of making well-timed exits from markets where it has trouble taking a lead or making a profit. However, Vodafone CEO Vittorio Colao has outlined many times that emerging markets are a major pillar of the company's overall strategy. The long-term potential from India remains huge and the new entity's greater scale and better cost efficiencies should enable it to capitalise on the opportunity. Furthermore, such an investment acts as a useful hedge at a time when recovery is still only tentative across Vodafone's expansive European operation.