Where Will Vodafone Drama End?

The stand-off between Vodafone Idea and New Delhi has gripped the business world like a Bollywood melodrama. All indications suggest the government will not grant concessions to the beleaguered telecoms giant, a decision which would likely cause Vodafone to quit the country. It is a classic tale, an unstoppable force meets an immovable object. But as is so often the case, the hard-line leaves no winners.

India is the world’s second-largest mobile market with over 1.2 billion mobile subscribers, growing at a breakneck pace, and the single largest consumer of data globally. This paints an attractive picture of a truly buoyant market, filled with opportunity for innovative mobile operators. Why then is Vodafone Idea, once the largest network in India with over 300 million subscribers and 30 per cent market share, finding it so difficult to flourish in the country?

Vodafone would argue that government regulation is to blame. The effective double taxation of operators through spectrum fees and adjusted gross revenue (AGR) is untenable. This framework was built for the late 1990s and early 2000s, not the 2020s. Mobile connectivity is now central to people’s lives, businesses, and the economy in a way that could not be envisaged when the tax was first implemented.

The industry’s position is that the government must, and will, offer concessions. Vodafone Idea Chairman Kumar Mangalam Birla reportedly met with the Finance Minister Nirmala Sitharaman behind closed doors, and the company’s stock soared on rumours that the government would defer invoking bank guarantees.

However, should there be no relief for Vodafone Idea, Vodafone’s global Chief Executive Nick Read has made it clear that there will be no further investment into India — effectively confirming that Vodafone Idea will go into liquidation. Yet despite Vodafone’s ultimatum, behind the scenes, the company must recognise that leaving India would have serious consequences for its brand and expansion prospects globally.

Vodafone’s desire to lay the blame for its failure at the door of the regulatory framework and government obstinacy is convenient, but perhaps not the whole story. Vodafone has been in trouble in India for a while. It has struggled to repay bank loans and it has been losing market share — shedding 36 million subscribers in November of last year alone.

Vodafone Idea’s “iPhone Moment”, like Nokia’s downfall at the hands of a new and disruptive force in the market, came when Reliance Jio launched three years ago and quickly became the fastest-growing company in history. Jio upended the market with a new low-cost approach to data with free texts and calls, prioritising scale over profitability like a Silicon Valley startup. This new approach, treating data as a commodity and mobile telecom as a utility, creates healthy competition for consumers. Incumbents like Vodafone Idea, however, failed to adapt their business models to respond.

As I previously told this newspaper (Business Standard, November 19, 2019), Vodafone Idea lost its focus on customers and the competition. Distracted by group-level priorities of rationalisation and consolidation, it fell behind rivals in data provision, 4G coverage and network performance. Ultimately, it has not shown the innovation that the world had come to expect from Vodafone over the past 30 years.

Vodafone holds a proven track record in mobile innovation, as demonstrated by its mobile payments giant M-Pesa. As India shifts from a cash-based to cash-less mobile-first economy, there are vast opportunities for value-added solutions — be they through partnerships with like-minded businesses or through proprietary technology platforms. Vodafone has the building blocks, products and infrastructure to leverage innovation in India for ideas that will help it expand into new markets like the United States and strengthen its position in Europe.

So, is it really the end for Vodafone in India? According to its executives, Vodafone cannot continue to throw good money after bad. However, once the curtain falls on its Indian tragedy, shareholders will want answers: How does the incumbent and once-largest operator oversee such a massive disruption to the business and loss of value for shareholders?

Despite all the camera-ready posturing, Vodafone will not walk away from India without a fight, not at least without attempting to restructure the business to recover some of the billions it invested. Whatever happens to Vodafone Idea, the multi-billion-dollar question for Vodafone’s global ambitions is whether to go down in history as the disrupted or to seize the opportunity to become the disruptor.

For India too, the bad romance comes at a sensitive time for its economy. A dramatic shutdown would directly impact 300 million mobile subscribers and over 13,500 employees. From a fiscal standpoint, if Vodafone Idea defaults on its gross debt of Rs 1.2 trillion, the government would lose Rs 90,000 crore in tax revenue, raising India’s fiscal deficit by 40 basis points.

Robust and competitive telecommunications are the building blocks for the Digital India initiative. A burgeoning mobile ecosystem will enable growth across every industry vertical of the economy, from commerce to agriculture. A failure of Vodafone, other incumbents and the government to act together to come to a pragmatic conclusion could be disastrous.

The Indian telecommunications market is already moving towards a duopoly, and that is an unhealthy economic outcome that consumers and policymakers will be keen to avoid.―Business Standard