In March last year, Arun Sarin was a man in pomp, and looked to be a bit carried away. Having engineered the acquisition of majority equity in Hutchison-Essar by Vodafone, which he ran as the chief executive till recently, Sarin said the UK-based behemoth would be India’s largest mobile phone operator in three years.
The acquisition marked a high for Sarin’s turbulent stint at Vodafone and one thought it was natural that it would make him what they call irrationally exuberant. At the time of the acquisition in February last year, Hutchison-Essar, about to become Vodafone-Essar, had a subscriber base of 25.3 million, translating into a 15.7 per cent share of the market.
The top three at that time were Bharti with 21.9 per cent share of the market, Reliance Communications with 20 per cent, and BSNL with 17.2 per cent. There was also the bit that Sarin had made the heady projection at an evening cocktail celebration at the residence of the Ruias of Essar, his newest business partners.
Eighteen months later, the scepticism appears much less credible and Sarin’s claim much more so. The number of Vodafone subscribers in India has more than doubled to 49.2 million, pushing its market share up to 17.2 per cent.
Impressive, eh! But the true significance of this surge can only be seen in comparison. The company is breathing down the neck of number two RCom, whose 50.78 million subscribers give it a 17.7 per cent share of the market. That despite the fact that Vodafone is not a pan-India player — its footprint is confined to just 16 of the 23 circles. RCom has a national presence.
RCom’s national network operates on the CDMA (code-division multiple access) platform, a technology that hasn’t found as easy an acceptance in India as GSM, which is the bedrock of Bharti, Vodafone, and the gang. (RCom’s GSM operations are small, based on the licences for some eastern states obtained when mobile phones first started in the country.)
The CDMA handset is wedded to the service, denying the user the option to quickly change handsets in a market that receives a new, improved model every other day. Despite this, an aggressive pricing strategy has helped RCom become number two.
Curiously, Vodafone’s surge has coincided with a sluggishness in RCom’s numbers. It added an average of just 1.6 million subscribers in the last five months, though June was marginally better at 1.7 million. Its share of the net subscriber additions in June was just 17 per cent. Vodafone, armed with more cell sites, lured 21.3 per cent of the net additions.
From here on, things may not move as quickly for Vodafone as they have in the last 18 months. First, RCom intends to kick off a pan-India GSM network in a few months. Second, even as Vodafone stays hot on RCom’s heels in chasing subscribers, it’s not an apples-to-apples comparison on the revenue front. RCom offers other services, too.
However, assuming an average subscriber base of 35 million and an average revenue per user (Arpu) of Rs 350 a month, Vodafone’s revenues for the year to March 2008 would be about Rs 14,700 crore. Using averages of 38 million and Rs 348 for RCom results in revenues of Rs 15,868 crore — the actual revenues were Rs 15,214 crore.
In the case of Bharti Airtel, an average of 50 million users and an Arpu of Rs 357 yield revenues of Rs 21,400 crore, not far away from the reported Rs 21,870 crore. RCom’s wireless business, however, is far more profitable, where its operating margin, at 40 per cent, is far higher than Vodafone’s 32-33 per cent. RCom’s global and broadband businesses accounted for about a third of its total revenues for the year to March 2008.
With RCom’s GSM launch some time away, industry watchers say its growth for the year to March 2009 could start to taper off. A recent report by brokerage house Citi has lowered the estimates of subscriber additions for RCom from 21.3 per cent share of net subscriber additions to 18.2 per cent. That would mean about 1.7 million subscribers a month, instead of 1.8 million, falling further to 1.6 million in the following year. If RCom does not defy Citi, it would have to settle for a subscriber base just short of 67 million by March 2009.
The CDMA business seems to be losing momentum. Despite a fall in tariffs, the minutes of usage per subscriber per month for RCom were down 1.4 per cent in the June 2008 quarter to 424, while the revenue per minute saw a sharper fall of 10 per cent to 66 paise, in line with GSM peers’. In contrast, market leader Bharti Airtel’s minutes of usage rose to 537 minutes from 507 minutes in the previous quarter. “The June numbers expose how vulnerable the company is to tariff cuts by the competition,” says an analyst.
For Vodafone to overtake RCom by March 2009, it would have to net 2 million subscribers every month. By that time, it will have entered six more circles, but that order remains tall. Romal Shetty, executive director with KPMG, says it will help that Vodafone would be addressing a far bigger market with populous states like Madhya Pradesh, Bihar and Orissa in its footprint.
Vodafone is working overtime to ensure that the rollouts in new territories are quick. Says Harit Nagpal, marketing and new business director: “We know it’s not going to be easy to penetrate new circles.” But he believes that perseverance and penetration can deliver results. “We have beefed up our network over the past 18 months. If we were putting up 1,000 cell sites a month before February 2007, we have been doing 2,000 sites since then. That’s why, if I was acquiring a million subscribers a month then, I’m now picking up 1.7 million.”
Apart from a larger network, its offer of handsets for Rs 1,200 apiece has attracted subscribers. Explains Nagpal, “Vodafone, because of its global scale, brought us improved negotiating capabilities with handset manufacturers. We’ve already sold around 3 million branded handsets and we’ve bundled a two-year replacement warranty with them.” In addition, Vodafone has virtually doubled the number of its outlets — large and mini stores — to over 3,000. The dealer network, too, has been strengthened and the company now has 600,000 of them across the country.
Meanwhile RCom is readying to roll out its national GSM network. A parallel network should give RCom not only more customers but also a better mix of users, making the business more profitable: the average revenue per user for the company fell to Rs 282 in the June 2008 quarter from Rs 317 in the March quarter. Vodafone’s Arpu is higher at about Rs 350, though most GSM players have suffered a drop in this figure in the last six months due to a fall in tariffs.
“Reliance Communications would soon become India’s only telecom service provider using both GSM and CDMA technologies to provide best-class and affordable telephony services to many million Indians. Reliance Communications holds 25 per cent market share in the circles where it offers telecom services using both CDMA and GSM platforms. The nationwide launch of RCom’s GSM service will commence by the end of this year and will be completed by mid next year,” a spokesperson for the company said.
However, RCom, being a late entrant in virtually every geography, will be addressing a smaller market given that the more profitable urban centres are already deeply penetrated. There is also the chance that RCom could end up cannibalising its CDMA customers.
“The intensifying competition, pricing pressure, high capital expenditure and lower quality of incremental subscribers will make value accretion from the GSM expansion extremely challenging,” says a report by Kotak Securities. Nevertheless, Shubham Majumder, who tracks telecom for Macquarie Securities, says the company’s operating performance will improve with the launch of the pan-India GSM service over the next 9-12 months. “RCom will be a key beneficiary of the growing wireless market in the country over the next two years,” he says.
When it comes to offering services to companies, RCom looks to be better placed than Vodafone, especially for data services. “RCom has made large investments in infrastructure and is probably better equipped to service companies given that it is an integrated player,” says an industry observer.
However, Vodafone, in most markets around the world, has a disproportionately high share of the enterprise market. In India it has started servicing those multinational companies with which it has a relationship globally. That list includes big names like IBM and Accenture.
Apart from providing global billing services, Vodafone, according to its head of enterprise business Ravinder Takkar, will woo large Indian companies with products developed globally. The big opportunity could be in the small and medium enterprises sector. “While many of these outfits may already be our customers we could probably offer them products and services more relevant to their needs,” says Takkar, adding that servicing corporations can be a fairly lucrative business despite the cut-throat competition.
With the third generation of mobile services, which offer much higher data speeds, about to start in the country, a new battle ground beckons. Vodafone hopes to leverage its global experience in this arena to score over the competition. In the meantime, the company intends to offer payment solutions as and when the regulatory environment permits. While Bharti has made a small start in this direction and appears to be creating a USP of being in the payments and money transfer services, Nagpal says Vodafone, too, has delivered banking solutions and will add to the suite of products as soon as the regulations and systems are in place.
Industry watchers say RCom’s ostensible plan to offer entertainment solutions through mobile telephony could also be a good way to attract users. Vodafone, too, is eyeing it. “My customer doesn’t suffer because I have a partial NLD (national long distance) network. Neither has he ever paid more than others to roam in states where we don’t have a presence. It’s up to us to decide whether we should buy the service or invest in it. In the past we have always had roaming tie-ups in states where we didn’t have a wireless network,” says Nagpal.
The fact remains that RCom is an integrated player with a large long-distance telephony business and an international cable network and is likely to derive far greater efficiencies by using them. It’s unlikely that Vodafone will be able to replicate that model and may remain a pure-play mobile operator. That does not worry the company. It hasn’t done too badly so far.
6 months ago