With every passing month, the chances of the survival of Vodafone Idea (Vi) look slimmer.
This means the government must take one of two critical decisions, if it does not want to reduce competition to a duopoly between Reliance Jio and Airtel.
One could be Vodafone’s temporary nationalisation, by converting almost all dues to equity. It can be sold later, once the company’s cash flows improve.
The other alternative is to allow the existing near-duopoly to consolidate its hold on the market on the assumption that this is the only way to improve telecom investments and quality of customer services.
This means allowing Vodafone to slowly wither away or be taken over by one of the Big 2. The latter is a better option.
The slow-motion decline of Vodafone began from 2016, when Jio first launched its disruptive VoIP-based telecom service, offering the cheapest data packages in the world.
Since then, only Airtel has been able to withstand the competition, through a mix of tariff hikes and infusions of equity.
Vodafone, despite having two strong promoters, Vodafone plc and the Aditya Birla group, has not been able to do so. And this despite the government allowing Vodafone to convert a part of its outstandings into equity.
But even with the government as a major shareholder with more than a third of its equity, Vodafone has not been able to turn around, and its promoters have been niggardly in bringing in more cash.
So, the situation is clear:
One, Vodafone’s promoters do not clearly have enough faith in its long-term viability to inject liberal doses of equity into the firm.
Two, despite some marginal improvements in quarterly losses in the January-March quarter of 2023, the company is bleeding profusely. Losses in the last quarter of fiscal 2022-23 were Rs 6,419 crore, and annual losses (consolidated) were a massive Rs 29,301 crore.
Three, competitors are steadily grabbing Vodafone’s customer base, and in April, according to data from the Telecom Regulatory Authority of India, Vodafone lost three million subscribers, almost all of it to Jio.
Jio is now going for the kill with the launch of its Jio Bharat phone at Rs 999, with a monthly subscription rate of Rs 123 in which 14 GB of data and free voice calling have been bundled. While the phone is not clearly a smartphone, it is Internet-enabled, and is targeted at the 250 million users who are still on 2G. Most of them could be Vodafone users.
It will not take long for Vodafone to suddenly collapse and file for bankruptcy if Jio actually succeeds in weaning away 2G subscribers, but here is the real thing the government must acknowledge.
Vodafone is not viable anymore, and more than anyone else, its promoters seem unwilling to bet on it.
In the United Kingdom, Vodafone promoter recently announced a merger with Hutchison’s 3, to become the UK’s largest telecom company.
If it is struggling even in its home market, it is not difficult to see why it may be reluctant to pump huge dollops of equity in its India operations. The Aditya Birla group too may not want to pick up the tab.
The best solution, if the government is not willing to temporarily nationalise it, write off its dues, and put it back on the market, is to allow the Big 2 to bid for it.
This will have two benefits. (a) It will protect the interests of Vodafone’s existing 233 million customers as of April 2023, and (b) it will allow a larger duopoly to push up investments in 4G and 5G expansion, while keeping tariff hikes to a minimum.
Tariff hikes will have to be kept reasonable so that profitability depends on larger volumes, and not higher margins per user.
As T C A Srinivasa Raghavan wrote in an recent article on aviation economics in The Hindu BusinessLine, in some sectors like aviation and telecom, which need massive investments of capital while operating on thin margins, duopolies are natural.
What the government can do in order to prevent any abuse of duopoly power is to regulate tariff increases annually.
It is time to bite the bullet and not stick to theoretical claims that competition is always good. In telecom it has not worked.
A viable duopoly is better than a sickly third competitor who can barely hold its head above water, survive, and who may do actual damage to bank balance-sheets if allowed to go into liquidation.
Telecom Minister Ashwini Vaishnaw should know that whatever he decides, Vodafone is a goner: he can either allow it to be taken over, or allow it to die in through financial strangulation. Its better to let Airtel or Jio, or both, to take over half its consumer base each.
Jagannathan is Editorial Director, Swarajya. He tweets at @TheJaggi.
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