Time is running out fast for the embattled Vodafone-Idea combine, the entity which came into existence amid much fanfare only three years ago. Unfortunately, the debt-laden venture never came out of the shadow of their bigger rivals like RIL-offspring Jio and Sunil Mittal-helmed Bharti Airtel. Worse, it was an idea whose time never came! Now, as desperate promoters run helter-skelter, with some industry experts even suggesting a government- led bailout package, the billion dollar question is: Can the trouble-torn telco survive what looks like an existential crisis?

How often does it happen that a market leader with 40% revenue market share suffers 50% erosion in its share, that too in a short period of four years? It gets curiouser when this ignominy is handed out by a new entrant in telecom industry where incumbents hold huge lead and advantage.

In retrospect

Before we get to the current stage and contemplate on how Vodafone can turn it around, let us replay the series of events that led to this spectacular collapse. That story offers interesting if painful lessons in competitive corporate play. When we replay it in slow motion, hindsight will offer perspectives on the events and the ecosystem comprising of government policy, regulation and the legal system that conspired to debilitate Vodafone-Idea.

So, lets unravel the series of events starting with the disruptive entry of Reliance Jio, quiet exit of a clutch of weak players, coming together of the number 2 and number 3 telecom players and the court verdict that held that revenue share will have to be paid on all income.

Disruptive entry of Reliance Jio

After obtaining spectrum for delivering wireless broad- band data, Reliance Jio first converted that to a liberal- ized license and then bought more spectrum, built an integrated 4G IP network, developed voice over LTE protocol, built all elements such as hand- sets and mobile app for IP calls, and launched with a proposition that shocked the competitors. The big 3 brands knew what to expect from Reliance Jio—something big and disruptive. But they did not bargain for all a long period of FREE services (3 months extended to 6 months) and a permanent value proposition of free voice calls. There was simply no counter to that and during the free period, the incumbents were torn between taking a big erosion in revenue and losing customers—neither option made any sense.

Ofcourse the consumer had to make a minimum monthly commitment of 150 to get a bundle of free voice and about 30 GB data per month. But except the bottom end of the market all other segments fancied the idea unlimited calling and 30GB monthly data quota.

Importantly Reliance network quality in terms of data speed, coverage and capacity and a near perfect acquisition process rattled competition and amazed consumers just as much as the unimaginable offers. Reliance had the gall to create a capacity to load 50 crore customers with very high usage and walk the talk.

Quiet exit of telecom brands

Telenor (under the brand name Uninor in India), Aircel, Reliance Infocomm (Mr. Anil Ambani’s group) and Tata Teleservices were among the big brands that quickly packed their bags and exited when Reliance Jio unveiled their integrated 4G network and appetite for dominance. The exit of these players only inflicted more pain to the top 3 incumbents as they lost long term revenue from leased passive infrastructure. Low-ARPU prepaid Subscribers of the networks that shut down mi- grated to the incumbents. By then erosion of revenue from tariff collapse and churn of high ARPU customers started happening at a fast clip that this gain was insignificant.

Vodafone-Idea merger

Vodafone and Idea were number 2 and 3 respectively and post-merger they emerged as the largest player in terms of customer asset—41% revenue market share and 35% customer market share (as on Dec 2016) and number one position in 17 out of 22 telecom circles At a qualitative level the merger created synergy and network quality in terms of the largest infrastructure in terms of spectrum and towers.

The merger was constructed with a clear game plan to realize Capex efficiency and Opex synergy. The economies extended beyond network quality and spectrum depth to distribution reach and brand power.

Vodafone- Idea was ahead on total quantum of spectrum and towers, they were behind on 4G electronics and the network with 2G, 3G and 4G electronics did not have the capacity or speed to match the fully integrated 4G network of Reliance Jio. In a sense the incumbent advantage was forfeited even be- fore Reliance Jio entered and both Airtel and Vodafone-Idea had to play network catch up immediately after Jio’s launch. Between the 2 incumbents Vodafone- Idea was slow to upgrade the network and contributed to their plight.

The merger came with challenges such as giving up customers in those markets where the combined market share was more than 50%, keeping employees motivated in a context where a good number was likely to be re- trenched, integrating the towers and spectrum within a short time frame, limitations in terms of surrendering redundant spectrum (at least in the short term) at a circle level.

The operational elements of the merger created a distraction at a time when Reliance Jio was taking the market by storm. Airtel took advantage of Vodafone- Idea becoming embroiled in merger and mopped up a higher share of subscribers who had to flee from the networks that closed down.

Vodafone- Idea stumble

Vodafone- Idea merger made public in March 2017 was consummated after due process and regulatory approvals in August 2018. The merger was well conceived and Vodafone-Idea evidently completed their network integration and optimization ahead of their planned date but it was still not adequate.

The most impactful blow was the steep price drop forced by Reliance Jio. Reliance Jio’s impact on incumbents’ revenue was deep and enduring. Opex synergy on account of merger could not cover for the revenue hemorrhage. By June 2018, the combined revenue of Vodafone-Idea revenue had plum- meted from 82000 cr to 54,000 cr (on annualized basis) and EBIDTA had cracked from 24,000 cr (30%) to 7,300 cr (13.5%). The combined net debt which stood at 1 lakh cr and had shot from a level of 4 times to 15 times of annual EBIDTA.

The incumbents may have initially nurtured some hope that Reliance will release the pressure a few months after launch. But for the first 2 years and more there was no sign of any tariff increase.

Reliance Jio realized that not only were they gaining in market share but the competitors were also losing money at an alarming and with that the incumbent’s ability to invest in and up-grade the network was also getting hampered. Reliance Jio had deep financial strength, no default revenue to protect and a long-term perspective to dominate the market. They were in no hurry to raise tariff and stuck to the plan of going after customer market share.

Vodafone-Idea’s revenue and customer leadership evaporated in quick time and it was simply not ready for a long period of acute financial stress. If they had not merged the pain would have been even more acute and they could have been simply washed away faster. If it was an acquisition and not a merger maybe they would have made haste with the integration and continued investing in network upgrade to match competition, even while suffering financial stress. The merger was some- how seen was a panacea and they underestimated the period of distress and the need to invest in upgrade.

Vodafone-Idea collapse: Is it all their fault?

It was an egregious error on the part of the Competitive Commission to con- tend that Reliance tariff was not preda- tory as they were not the dominant player at the time of launch. The results show that the incumbents have been plunged into a huge loss and for a long and indefinite period. The fact that Reliance Jio is showing low levels of profit does not prove that the current tariff levels is optimal or the business is operating with healthy financial. Reliance Jio is reporting profits disproportionately low for the scale of investment in the business and even that is achieved by capturing depreciation based on capacity used, an accounting method that is different from the one followed by incumbents, even if it is in conformity in international accounting standards.

The regulator did not respond to re- peated request for defining floor tariff levels and failed in their duty to protect the financial health of the industry and the fact that in the last 5 years the industry revenue has tapered down and hit a plateau even when consumption has gone through the roof is testimony to the magnitude of erosion.

The government has not covered itself with glory either as a mute spectator to the Supreme Court ruling and pitching only to the extent of allowing a staggered payment of the dues after a moratorium. Either the regulator or the government should feel obliged to explain the financial situation of the public sec- tor units, if they were to hold that the tariffs are operating at an acceptable level.

And if there was not enough misery already, Supreme Court which was hearing the dispute revenue definition ruled that revenue share has to be paid on all revenue. With the total period of the claim running into several years and the interest pay-out ballooning the liability for Vodafone and Idea was a monstrous figure.

This broke the morale of Vodafone- Idea and they have been on a sharper downward spiral from that date.

Vodafone-Idea financial stress

In the last two years of operation Vodafone- Idea has posted loss of 1 lakh cr and is facing a serious financial crisis in terms of cash flow, business model viability and business continuity. There is no letup in terms of the financial pressure and even if we ex- clude the exceptional and one-time financial payout of revenue share with interest the annual running rate for loss is in the order of 25,000 cr.

There is no visibility of a solution to the financial stress in the foreseeable future and the question of existence is a stark reality.

Airtel and Vodafone-Idea fortunes inversely related!

Airtel was the market leader before the merger, and it is an interesting question as to how Airtel managed to dig their heels and face the Reliance Jio onslaught better than Vodafone- Idea. Airtel stayed focused on both network upgrade to 4G and focused their energy on customer retention and acquisition without having to operationalize a merger. They also aggregated customer and network asset of Aircel, Uninor and Tata Teleservices at a bargain price.

Airtel’s financials are significantly better than that of Vodafone- Idea though they are also stressed. Airtel’s revenue is 70% higher than that of Vodafone-Idea while the depreciation is comparable.

It was initially expected that Airtel and Vodafone-Idea will join hands against the common enemy and will stitch together alliance for sharing of active network elements. It was also expected that they join hands for a shared 5G network rollout.

But the expectation of coming together started dissipating the moment Vodafone-Idea started showing signs of financial distress. Instead, curiously Airtel with slightly better financial po- sition is buoyed by the prospect of Vodafone-Idea going broke. A prolonged financial crisis at Vodafone-Idea creates a strong case for a bailout package from Government and this is a benefit that will accrue to Airtel (and Reliance Jio) as well. More importantly a weak Vodafone-Idea creates opportunity for Airtel to churn existing subscribers and achieve better share of incremental business and this is easy picking for Airtel (and Jio). Airtel is therefore watching predator and is less likely to be in a mood to join hands with them.
This can of course change when Vodafone-Idea stop sending exit signals and start pursuing business aggressively. There is no other possible suitor to buyout Vodafone-Idea with their accumulated debt and the urgent need for re-investment in 5G and net- work upgrade.

Government to rescue?

Both from a political and self-serving financial perspective, the government is unlikely to offer any direct financial waiver towards revenue share-related liability. The government may at best offer extended period for payment of the dues with a rationalized interest rate. While this helps in cash flow, this does not solve the business viability problem.

Similarly, the government is likely to persist with high minimum bidding price for spectrum based on price realized in the past and the reduction in revenue share,if it at all happens is likely to be modest and gradual over a period of time.

The regulator has desisted from de- fining the floor price till now but may just do so going forward as all operators quietly acquiesce to the proposal. But the floor price definition may be modest and allow for bundling of products and it may be case of too little and too late for Vodafone-Idea.

What are the options for Vodafone-Idea?

Vodafone may continue to exert pressure on the government and regulator for a financial revival package. But it will take an independent decision to stay on and fight or exit now without further adding to its losses. In its decision to stay on, it will possibly explore a joint 5G rollout with Airtel faster rollout. Telecom is integrated play in terms of product, service and capacity and Vodafone-Idea may not have the luxury of rescaling the business or the geography. If it stays it will be an integrated and Pan-India network. Vodafone has to reconcile itself for a further period of low tariff and factor in- crease in realization as a slow process. Vodafone has to factor additional in- vestment in 5G and network capacity.

The decision to stay or exit is contingent on the answers to the following questions:

• Can the spectrum pay-outs and financing cost be met over the balance license period?
• Can they raise funds to invest in 5G and stay competitive on network quality?
• Can the above be achieved despite a slow increase in realization and less than fair share in incremental market?
• What is the projected revenue and net profit in the residual license period?

The recent events may have created a negative sentiment, but Vodafone- Idea will remain hard-nosed about taking this business decision on hard facts and business projection. Vodafone-Idea will take this crucial decision before it invests in 5G resources and till such time it may keep its options open and investment light.

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