Consolidation has been the theme of the Indian telecom industry for the past few years. It started with Loop trying to sell its Mumbai operations to Airtel but failing to do so because of issues DoT had with Loop customers being transferred to Airtel. The deal with Airtel fell apart but Loop nonetheless packed its bags and left Mumbai as its license was expiring and it was in no mood to buy spectrum in Mumbai. Loop’s departure was then followed by a slew of mergers and acquisitions, which saw MTS merging with Rcom, Videocon selling itself to Airtel, Aircel trying to merge itself with Rcom and now comes news of Vodafone and Idea thinking of a merger.
As per reports so far, the Vodafone-Idea merger will be an all-stock deal where fresh shares in Idea will be issued to Vodafone. Both Vodafone and Idea will have equal voting rights in the new company and Himanshu Kapania, the current CEO of Idea is expected to be the CEO of the merged entity. Most analysts have been upbeat about the Vodafone-Idea merger. The general consensus is that the Indian telecom industry is too crowded and the number of operators needs to reduce going forward.
Now, while I agree that the Indian telecom industry is very crowded compared to international markets, and consolidation needs to happen amongst some operators as we move forward, but I feel we need to take a closer look at how crowded the Indian telecom industry really is. While on paper the Indian telecom industry does indeed look crowded, looking at the raw number of telecom operators in the country, it is necessary to evaluate the competitive intensity at various levels and then come to a conclusion.
Voice and data: two sides to Indian telecom
I feel there are two types of markets within the Indian telecom industry which are voice and data. As of now, there are nine distinct telecom operators in India. However, not all of these have equal competitive intensity in both voice and data. When it comes to voice, there are a number of credible competitors. For instance, if you feel that Airtel is charging you more than you should be paying for calls, then you can use BSNL or Reliance and rest assured that you can make decent quality voice calls on them at a cheaper rate. If your sole purpose is to make calls, then BSNL or Reliance’s network is a very credible alternative to Airtel or Vodafone.
However, the same is not true about data. When it comes to data, there’s 2G (EDGE), 3G (WCDMA) and 4G (LTE). In my own personal experience, I have seen that the moment we start taking data into consideration, the competitive intensity shifts significantly and the data market for all intents and purposes is nowhere near as competitive as the voice market. First of all, let’s start with 2G or EDGE, in my own personal experience and I am sure several others would have noticed the same, the stability and quality of EDGE connections on Airtel, Vodafone and Idea is miles ahead of BSNL, Aircel and Reliance, and other players.
The situation only keeps getting worse as we move up the data connectivity ladder. When it comes to 3G, hardly anyone apart from Airtel, Vodafone and Idea have meaningful coverage on a pan-India basis, and operators like Rcom and BSNL simply are not investing enough to expand and improve their 3G networks. Moving on from 3G, 4G is really where it becomes crystal clear as to how many operators really have the ability to invest in 4G LTE play for the long term. In my opinion, only four operators – Airtel, Vodafone, Idea and Reliance Jio – have the ability to invest in 4G and move forward in the telecom sector.
The struggling 4G players in India
The reason I have shortlisted those four is because I feel other operators are not equipped to play the 4G game in the long run. Let’s take a closer look at where they stand:
Rcom is operating like a mobile virtual network operator (MVNO) when it comes to 4G. The company has not rolled out any 4G telecom network of its own and is piggybacking on Reliance Jio’s network. Anil Ambani has himself said that Rcom and Jio have virtually merged. Rcom simply does not have the financial strength to roll out an independent 4G network in the future. The company was not even able to renew its 2G licenses in several circles and lacks spectrum in the 1800/2300/2500 MHz bands for rolling out 4G.
Aircel is trying to merge itself with Rcom but the Supreme Court is threatening to cancel Aircel’s 2G licenses because its foreign promoters are not appearing in front of a lower court. If the promoters of a company are not bothered about licenses being canceled and the potential loss in revenue, it speaks in volumes as to how serious the company would be about 4G. Anyway, Aircel has sold its 2300 MHz spectrum to Airtel and has no spectrum to deploy 4G.
Telenor has deployed narrowband 4G in select circles but the company has already signaled its intention to leave India by selling to Airtel and very recently there has been news that Telenor is trying to merge itself with the Aircel-Rcom merger.
Tata has lost a lot of money in telecom and I am sure that apart from stop-gap solutions that would allow Tata to continue its fledgling 2G and 3G operations, the company will hardly be interested in deploying 4G.
BSNL & MTNL
MTNL has already surrendered its 2500 MHz band 4G spectrum in Mumbai and Delhi and BSNL has surrendered its 2500 MHz spectrum in a number of circles as well. The state-run telcos have no plan to roll out 4G on their own and seem more interested in a revenue sharing model whereby BSNL leases its 2500 MHz spectrum wherever it still has it, on a revenue-sharing basis to interested third-party telecom operators.
The point that I am trying to make here is that even though on paper it may seem as though the Indian telecom sector is very competitive and extremely crowded, that is actually not the case on all levels and services. While the voice segment is indeed very competitive, the intensity in the data segment is very low, especially when it comes to 4G. As far as 4G is concerned, India has just four operators.
And then there were three… and disaster followed?
I have already explained how when it comes to 4G, there are just four operators: Airtel, Vodafone, Idea and Jio. If there is one general trend that I have noticed in the global telecom market, it is that whenever the number of operators gets reduced to three, the competitive intensity of the telecom market reduces significantly. This is not just my opinion – several antitrust agencies such as the European Commission and DoJ also agree.
When Hutchison’s Three tried to acquire O2 from Telefonica in the UK, the deal was blocked as it would have reduced the number of operators in the UK from four to three. In another case, the US had blocked AT&T’s attempt to acquire T-Mobile in the past as it would have reduced the number of operators in the US from four to three and it was probably one of the smartest decisions ever. Most deals trying to reduce the number of operators in the market from four to three have met with resistance and deals which have gone through have harmed the consumers. EC had approved Three’s acquisition of O2 in Austria and to quote the Fierce Wireless article, this is what happened:
AK found the cost of an A1 package with data increased from €22.90 ($27) in September 2013 to €34.90 in December 2014. A similar T-Mobile package price rose from €10 to €22.99 over the same period, while Three’s charges have increased from €7.50 to €15. So-called ‘power’ users have seen similar rises. A1’s costs on a tariff including data grew from €22.90 to €34.90; T-Mobile’s from €10 to €22.99; and Three Austria from €7.50 to €15. Hutchison Whampoa completed a €1.3 billion acquisition of Orange Austria in August 2013, in a move that reduced the number of mobile network operators (MNOs) in the market from four to three.
Small wonder then that all over the world, regulators have actively blocked attempts to reduce the number of operators in the market from four to three. One look at the competitive intensity of telecom markets worldwide and it becomes clear that the markets with just three operators or even lesser are the least competitive markets.
Now, approving the Vodafone-Idea merger will similarly reduce the number of 4G operators in India from four to three and in my opinion, its long-term consequences will be negative as data penetration in India is still very low and we need a decent amount of competition in order to make sure prices remain low and adoption increases.
Not as competitive as it seems
I also feel that people and analysts alike are actively discounting two important aspects while talking about competition and how the Indian telecom market works.
I feel the competition aspect is not fairly evaluated. I have explained how even though on paper it might seem like there exist nine operators in India, the 4G operators or the operators that would matter in the long run are just four. Similarly, in the previous paragraph I have pointed out how reducing the number of operators from four to three can be disastrous for competition.
Now, let us talk about revenue market share (RMS). When it comes to 4G, there is no doubt that Airtel, Vodafone, Idea and Jio have rolled out 4G networks in India. One has to agree that Jio has made a massive investment of USD 22-25 billion on its 4G networks. However, telecom sector requires regular cyclic investments of capital expenditure in order to ensure that networks remain in good shape. Companies need to spend money on buying spectrum and new telecom gear every few years so as to ensure that their network remains competitive when it comes to quality.
Now, for all the investment Jio has made in the telecom sector and for all the SIM cards it has managed to sell, its effective RMS is zero. Although for the first few years, RIL will continue investing in Jio and take a loss, Jio will have to start showing returns at some stage down the road for RIL to continue investing in Jio. The only way Jio can start making a return on the capital deployed is if it starts gaining RMS from its rivals, RMS which currently stands at zero.
It must be kept in mind that even Tata Docomo launched with much fanfare and was among the first few operators to roll out 3G in India. Both Tata and Docomo kept making investments in Tata Docomo for the first few years. However as it became clear that Tata Docomo would not ever be able to make a profit or gain RMS, both Tata and Docomo stopped investing to quite an extent. In fact, Docomo is willing to sell its stake in Tata Docomo for half the price and exit its Indian telecom venture although the RBI is not allowing it to do so.
The point I am trying to make here is that even though Jio might seem like a formidable competitor because of its being backed by RIL, in the long term, Jio needs to gain RMS and deliver returns for RIL in order for RIL to keep investing in Jio. If Jio gains RMS and delivers returns on capital deployed, then it will surely become a long term player in telecom. However, if Jio is not able to gain RMS and has negative earnings before interest, tax, depreciation and amortization (EBITDnoA, for abbreviation lovers) for years together, then it will end up being another Tata Docomo.
Now if Jio is not able to gain RMS and fails in the long run, then the entire 4G market in India will be split between just two operators, one being Airtel and the other one being Idea+Vodafone. I have detailed the impact on competition when the number of operators reduces from four to three – if it reduces to just two then we will have oligopolies of the worst order running 4G networks in India. Imagine a country of more than a billion people having just two 4G network operators. The 4G operators will be milking money while the general public would have to pay top dollar for data. Also if Jio fails to take off, then rest assured, no one would want to enter India’s telecom field as the cancellation of 2G licenses in 2012 has already ruffled a lot of feathers amongst international telcos.
India’s telecom industry is not a stranger to cartelization and almost all of us have experienced it. The most famous cartel is that of Airtel, Vodafone and Idea. The three combined hold around 75 percent of RMS in the Indian telecom market. A big reason why these three have been able to continuously increase their RMS at the expense of others is because they simply did not compete with each other in terms of price. Airtel, Vodafone and Idea identified their leadership circles and did not compete with each other in these circles on pricing. This is evident if you consider how whenever one of the members of the cartel would increase or decrease the price of their data packs, the others would immediately follow suit. For example, if Airtel increased the price of its 1 GB data pack from Rs 200 to Rs 250, Vodafone and Idea would do the same within a matter of days.
The logic behind cartelization is that if telcos fight with each other, then none of them would be able to turn a profit. However, if on the other hand, telcos shook hands with each other and agreed on a particular pricing then everyone in the cartel would benefit. And this cartelization has worked in India. With every passing year Airtel, Vodafone and Idea keep having a bigger share of the RMS pie while others suffer.
It is not difficult to envision a similar cartelization taking place in India if the number of 4G operators in India is reduced to three. Jio seems set to provide cheap tariffs for some time now and would try and steal customers in the short term. However, in the long term what matters for Jio and every other telecom operator is to make a return on capital deployed. If by operating as a cartel, Jio, Airtel and Vodafone+Idea can get better returns on their investments, then this is a very real possibility. On the other hand, maintaining four operators in the market reduces if not completely eliminates the prospect of a cartel being formed.
America Movil is a carrier that operates in Mexico and enjoys more than 50 percent market share in Mexico. The owner of America Movil, Carlos Slim, was the richest man on earth a few years ago and still manages to make it to the list of top 10 richest people on earth. He has made the vast majority of his wealth from the carrier alone. The monopoly that America Movil has had on Mexico has, however, been absolutely disastrous for the country. Mexico has failed to provide telecom services in rural areas and people pay some of the highest rates in the world for data and calls. The situation was so bad that ultimately the government had to interfere and tweak rules and policy so as to invite foreign telecom operators to Mexico.
The perils of oligopoly
AT&T finally entered Mexico last year and America Movil had meaningful competition. But during all this, Mexico has a severely underdeveloped telecom industry and the negative impact America Movil’s monopoly might have had on Mexico’s economy is horrendous. While Mexico was dealing with an oligopoly in its telecom market, the US had to make a decision as to whether it would approve AT&T’s acquisition of T-Mobile. The Department of Justice (DoJ) turned down the acquisition and it now seems to have been a very smart decision indeed.
Today, T-Mobile is known as one of the most innovative carriers in the US and has significantly helped in giving tough competition to AT&T and Verizon. While T-Mobile adds close to a million postpaid smartphone subscriptions, AT&T and Verizon have been losing them. Overall, the American telecom market is very competitive and price per GB has significantly fallen.
The point I am trying to make is that it is much easier to block an acquisition like the DoJ did in the case of T-Mobile and AT&T but very difficult to break an oligopoly like that of America Movil in Mexico. CCI or DoT can indeed block the Vodafone-Idea merger now. However, if a green signal is given to the merger now and an oligopoly is formed few years down the road then breaking that oligopoly would be an uphill task.
At the end of the day, I am just a writer and my opinion will hardly affect the merger. Indeed, considering the current mood in the industry, the Vodafone-Idea merger would most probably be approved. But I hope the people in charge look at the long term and then make a decision instead of being swayed away by the short-term trends in telecom.
The truth is that three “real” operators in a market as large in India are just too few. The need for the long term is greater competition. And three operators do not a competitive market make.
Which is why I think the Vodafone-Idea might not be a very good idea, Sirji.