Why Vodafone-Idea Merger Is Not A Big Deal

On paper, probably, its a big deal – that India’s No.2 and No.3 operators got merged to create a single entity. The new operator created out of Vodafone-Idea merger, of course, boasts of a subscriber base of 408 million – the highest – whereas the current No.1 – Bharti Airtel – has a subscriber base of 345 million. In terms of subscriber market share or SMS, the merged entity which is named as Vodafone Idea Limited, now commands a market share of 38% whereas Airtel’s market share is 30%. In terms of RMS or revenue market share, the entity created out of the Vodafone-Idea merger, is also enjoying the biggest pie.

So, on its face value, it appears everything got sorted for Vodafone-Idea, and they are going to be leader in Indian teecom business. However, things are not as simple as I put it. The underlying challenges, prevalent before the merger, are still there. And, they would continue to pose difficulties as Jio and the reigning champion Airtel would pull up their socks to disrupt the market yet again.

Jio has already announced what it intends to do in coming times!

The Challenges

The challenges, almost all of it, for the incumbent telecom operators started from the very day Reliance Jio made an entry to the Indian telecom space. With its disruptive business strategy, the most important being the free voice call offering, grabbed more than a 100 million customers within 100 days.

This was the first nail in the coffin but was strong enough to keep the incumbents in the casket. The incumbents used to get more than 70% of their revenues from voice services, and this was snatched away by Jio with a single stroke. Incumbents have not recovered from that yet. Neither can they, if they keep focusing on voice. The Q1 financial results of Idea Cellular reports its voice ARPU has reached Rs 73 – on a consistent decline fashion.

Data, that used to contribute around 13-17% revenue prior to Jio era, was made dirt cheap by the Mukesh Ambani-led firm. Within a year the data cost for 1 GB came down to Rs 15 from Rs 250 a year back. This also dented the incumbent’s revenue big time.

Content, though too popular among users, was never been a revenue earner for the telcos. And now, it is being offered by Jio for free and the other operators too followed suit.

All these challenges remain the same for all the incumbents including Vodafone and Idea. The merged entity does not seem to have any strategy to tackle it yet.

Why Things Would Not Change Much

Individually, Vodafone and Idea, were fighting their own fights against the sectoral tough conditions, largely brought by Jio. Their customer numbers, their ARPU, their infrastructure, their share of challenges and benefits – all remains the same even post the merger.

In the Vodafone-Idea merger, no individual party has anything to complement the other. Overall, both offered the same services, had equally good network infrastructure and their share of goodwill. Also, they equally, lacked any sort of innovations in their offerings nor did they have any disruptive business strategies.

From the network perspective, post the merger, the united entity will have more than enough spectrum, wide optical fiber footprint and huge number of telecom towers. Now post merger, they would like to synergise their airwaves dependig on their operating circles. Refarming and harmonisation of spectrum is one option they will definitely look at, which, at individual level, both were already doing. Obviously, post the merger, they will have a better holding of the scenario. They are already under an ‘active infrastructure sharing’ pact and are sharing more than 60,000 sites.

Manpower, a key asset and a revenue guzzler, as the companies see it, is one area the merged entity will try to cut some costs to add on to their balance sheets. Before the merger both the operators had a collective employee strength of 40,000 and post the merger it is expected there will a work force cut of around 10000.

“The key focus area for the merged team will be to fast forward the substantial cost synergies with an estimated NPV of ~$10bn and rapidly expand the broadband coverage and capacity by redeployment of overlapping equipment & refarming /consolidation of spectrum,” sates Idea’s Q1 report on the Vodafone-Idea merger.

Vodafone-Idea Merger : What They Should Do

I’m sure the big brains at Vodafone and Idea must be doing overtime to synergise their operations and trying to do ‘whatever it takes’ to create that “$10 billion NPV”. However, there are few key areas that both the firms should now look at, and that too with a binocular vision.

First things first. For the sake of customers, make your tariff plans as simple as you can. Jio has beaten you all with this trick! The incumbent operators do offer hundreds of tariff plans, both for prepaid and postpaid, and they sort of confuse the customers. Too many tariff plans means you are creating a too complicated BSS (billing support system). A simplified tariff plan can significantly improve the operators’ ARPU. Hope, Vodafone-Idea does this soon.

Enterprise or business services is one area the global telecom service providers are looking at for a health revenue stream. Enterprise services essentially involves dedicated data services, business enablement services and enterprise mobility services, besides security, storage and, data recovery and some disaster management services.

“Its a tough time,” says Cisco India MD for Service Provider Business Sanjay Kaul. “But the solution too lies in the data business.”

sanjay-kaul-cisco

Sanjay Kaul, MD, SP Business, Cisco India SAARC (Image taken at Cisco India Summit 2018)

As consumer data rates are all time low and it does not seem to go up, service providers including Vodafone-Idea should look at how they can focus on offering innovative services for enterprises and end consumers.

“What the SPs can do is repackage their data offering and offer it a wholesome solution rather than a GB-led product,” he said.

IoT – The internet of things is one technology that the whole industry is looking at as the next big thing. With 5G expected to become mainstream in next couple of years, IoT will play a big role for both consumers as well as industries to make their lives better. And no one can do more than what service providers can do for the proliferation of this technology. The new operator, Vodafone-Idea, cannot afford to miss this bus.

While the Vodafone-Idea merger is a good thing for the industry, as well as for the individual operators, it can only become better, if the new entity does not become complacent donning its market leader hat.

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