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Vodafone Essar

March 15, 2011
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After rallying considerable public interest through a series of teaser ads starring the ZooZoos (Vodafone Essar’s popular ad creation), during the ICC World Cup, the country’s second largest GSM operator has finally launched 3G services in March 2011. The “faster, smarter, better Vodafone 3G” (as the tag line goes) is planned to be rolled out in a phased manner by April this year in all the circles where Vodafone has won licences.

Vodafone’s 3G service launch comes months after rivals Tata Teleservices Limited (TTSL), Reliance Communications (RCOM), Aircel and Bharti airtel introduced their 3G services and set the tariff game rolling. However, Vodafone has been clear all along that it would launch 3G only when it is ready with a quality customer experience. Ensuring that the customer sits up and takes notice of its 3G services and views it not just as another communication medium has been a key priority for the company.

For Vodafone Essar, 3G is a big deal. Compared to its rivals, it has a larger proportion of high ARPU users where 3G uptake is expected to be better. Besides, the operator’s vast global experience makes the 3G proposition even more exciting. Year 2011 will, therefore, see Vodafone betting big on 3G and growth in data revenues to replicate its European success in India.

Also, as a good portent to 2011, nearly a month after the nationwide rollout of mobile number portability (MNP) services on January 20, Vodafone Essar has emerged as the biggest gainer. According to data released by the Department of Telecommunications (DoT), Vodafone Essar garnered 190,000 subscribers after MNP was introduced, outperforming operators like Bharat Sanchar Nigam Limited, RCOM, Idea Cellular and Bharti airtel.

“We are happy with the encouraging feedback. The choice for MNP is triggered by a number of factors. Typically, companies with a strong brand proposition, superior network quality, innovative and differentiated products and services, and greater predictability of customer service quality will have an edge. High-value customers are extremely wary of switching to untested operators. We, at Vodafone, have made considerable investments in our quality of network and customer service. We are also geared up with the technology to enable number portability. We believe that our business and brand proposition backed by our quality of network and customer service positions us to benefit from MNP,” claims Samaresh Parida, director, strategy at Vodafone Essar.

This is encouraging for the operator, which has spent the better part of 2010 fielding tax, promoter and spectrum allocation related issues.

Hurdles on the way 

In a first-of-its-kind case upheld by the Supreme Court, in September 2010, the Income Tax Department claimed a capital gains tax of Rs 112.17 billion from Vodafone for its acquisition of a controlling stake in Hutchison Essar in 2007 for $11 billion. The operator lost the landmark legal battle after a three-year-long dispute against the Indian tax authorities.

In November 2010, the Supreme Court directed Vodafone to make a down-payment of Rs 25 billion to cover a part of the disputed tax bill. The company was also asked to provide a bank guarantee from an Indian national bank for Rs 85 billion by the end of January 2011.

Despite maintaining that it was not liable to pay any capital gains tax for a transaction executed outside the country, Vodafone spent the closing months of 2010 arranging counter-guarantees from international banks and raising funds for the down-payment.

The past year also saw Vodafone get into a dispute with the Essar Group, a 33 per cent shareholder in the company. Essar, which has been looking to dilute a part of its stake in Vodafone Essar, has a put option, which gives it the right to sell part or its entire stake to Vodafone by May 2011. It can either sell the entire stake to Vodafone for $5 billion or part of it at the designated fair market value.

To get the right price for its stake in the joint venture (JV), Essar proposed to merge group company Essar Telecommunications Holdings Private Limited, which has 11 per cent stake in Vodafone Essar, with India Securities Limited. Vodafone objected strongly to this, claiming it would distort the valuation of the JV. This led to a war of words with Essar alleging that Vodafone was attempting to force Essar out of the JV and own 100 per cent stake in Vodafone Essar at an artificially depressed value.

The dispute continues, though it is less vitriolic now. Meanwhile, both partners have reportedly decided to appoint UBS as the third independent banker, which, along with Goldman Sachs and Standard Chartered Bank, will work out a fair price for the deal.

Spectrum issues 

Vodafone, otherwise a “quiet” operator, has been fairly vocal on 2G spectrum pricing and allocation issues. On several occasions through 2010, the operator pointed to the anomalies in the spectrum allocation policy. Recently, in a letter to the government, Marten Pieters, chief executive officer and managing director of Vodafone Essar, noted that the Telecom Regulatory Authority of India’s (TRAI) recommendations were flawed and urged the government to reject them.

Pieters’ letter is based on a report submitted by UK-based Plum Consulting, which was commissioned by Vodafone to analyse TRAI’s recommendations on additional spectrum pricing. According to the study, TRAI’s recommendation that telecom companies make a total one-time payment of Rs 175.13 billion for additional spectrum in the 1800 MHz band is flawed and lacks transparency, especially because the recommendations do not disclose all the models used in arriving at the value. The report also stated that TRAI had not followed practices such as pre-consultation discussions with major players, and publishing consultation documents covering methods, information and results.

For Vodafone, like most other telecom operators, spectrum is a key issue. Pieters, in fact, says that the lack of spectrum is responsible for the deteriorating quality of service. “In the London central district, 1 MHz of spectrum is used to serve 45,000 customers. In Delhi, it is used to serve 350,000 customers. This is our basic raw material. So, we build more towers than what is globally required to reuse spectrum,” comments Pieters.

The other key problem in addition to shortage of spectrum is that the company may be required to pay heavily for spectrum beyond the contracted 6.2 MHz if the TRAI recommendations go through.

Sound strategy 

Operationally, Vodafone Essar is on a good wicket. It has been doing brisk business since it began offering mobile services in Mumbai under the Hutchison Telecom brand in 1994.

Several mergers and transitions later, Vodafone Essar is a pan-Indian player today. It is part of Vodafone Plc, the world’s largest telecom operator with 358 million subscribers and operations in 30 countries.

Over the years, even as competition has become cut-throat and rivals have aggressively expanded their operations in the wireless space, Vodafone Essar continues to be a pure-play GSM operator. It is the largest company in the country in revenue terms and the third largest in subscriber terms. As of January 2011, the company had a subscriber base of 127.36 million, trailing Bharti airtel with 155.79 million customers and RCOM with 128.87 million users.

Vodafone Essar is a big league company, notes Dr Mahesh Uppal, director,  ComFirst. “It is focused and is doing very well. It has all the advantages of an incumbent in many of the circles it operates in. Since it started operations early, it has the best of spectrum with higher capacity. Besides, its smart and modern approach to business has helped it gain scale. The international experience from its formidable global parent Vodafone will also go a long way in giving the company an edge.”

Strategy-wise, the operator’s business plan hinges on tapping high-value users. It also has a strong presence in the large enterprise segment, which insulates it somewhat from the industry’s frequent tariff cuts. Other areas where the company scores well are marketing and branding, which, according to analysts, have always been well executed.

In fact, a key accomplishment of the company has been rebranding itself successfully – from Orange to Hutch and from Hutch to Vodafone – without losing a step or subscriber. “When we bought the company, we had 30 million customers. Today, we have more than 120 million,” says Pieters.

Customer acquisition and retention is also a top priority for Vodafone. The past year has seen the operator launch several innovative products and services. According to company officials, Vodafone tries to be in sync with customers’ needs in order to be able to introduce products and services tailored to suit the usage patterns of customers.

In May 2010, Vodafone bid aggressively in the 3G auctions and won 3G spectrum in nine circles (including the lucrative Delhi and Mumbai metros) for a total price of Rs 116 billion. With its operating expenditure pegged at over Rs 25 billion for 2011, Vodafone expects 3G to be the trump card for beating competition.

Vodafone believes that to make 3G a success, service quality is critical. “With all operators offering the same VAS, a robust network is the only thing that can attract and retain subscribers,” says Parida. The operator has, therefore, selected Nokia Siemens Networks (NSN) and Ericsson to supply, implement and manage its 3G network. While NSN will provide the equipment for rolling out 3G services in six circles (Tamil Nadu, Gujarat, Maharashtra, Uttar Pradesh [East], West Bengal [excluding Kolkata] and Haryana), Ericsson will manage the network in the three metro circles. NSN will also supply its energy-efficient radio and core network technology.

Another strategy followed by the company in the past few years has been selling Vodafone-branded handsets at affordable prices. In the past, the approach has helped Vodafone secure a foothold in the rural markets. Now, the company intends to execute the same game plan in urban areas to push its 3G services. It has been selling Vodafone-branded devices in India since September 2007. However, it has yet to make significant progress on this front.

Analyst view 

Without doubt, Vodafone has, over the years, managed to establish a strong brand presence in the country. “It has come up with innovative methods and never-seen-before ad campaigns to make its presence felt. For instance, its Happy to Help campaign focused on strong customer care and helped the company reach out to its customers better,” observes Uppal.

According to Sridhar Pai, CEO, Tonse Telecom, one of Vodafone Essar’s key strengths is its strong product portfolio. “The fact that it could successfully tap traditionally tough segments such as enterprise and retail speaks highly of its capabilities,” he says.

Pai also believes that the launch of 3G is a unique opportunity for Vodafone. “Vodafone is very 3G-ready as compared to other operators, especially in view of its global experience with this technology.”

However, a key area the company may want to review is how it deals with the Indian authorities. Uppal believes that the operator requires a better understanding and adjustment to the country’s regulatory environment. “The way the company handled the spectrum issue, for example, may not be perfectly in tune with the country’s regulatory environment. In this case, it is unlikely that the operator would have won many friends,” he elaborates.

Pai, however, looks at it differently. “Globally, Vodafone is considered a visionary operator. This is evident from the kind of scale the operator has built in multiple countries, continents and heterogeneous networks. Unfortunately, the operator has a lot of baggage in India, for example, the entire Hutch-Vodafone saga and the current tax case it has been fighting. It is also currently involved in a dispute with its partner Essar over the issue of insider trading. All this has to be cleaned up before the company can replicate its global strategies in India,” says Pai.

For Vodafone, a bigger hurdle is the fact that the revenues of the industry, which had peaked in January-February 2009, started falling soon thereafter. Even after two years, the situation has not improved much, though the subscriber base has more than doubled. So, while revenue growth remains flat, the user base has increased, forcing the operator to survive on wafer-thin margins.

According to company officials, though the Indian telecom market is huge, the problem is that there are too many players. While in most other countries there are five to six players, in India there are 15. This results in aggressive competition and frequent tariff drops, leading to revenues being squeezed further.

But despite the stiff competition and pressure on profit margins, company officials still believe it has what it takes to be successful here.

Besides, Vodafone has made significant investments in the country already. To manage the growth challenge, the operator will be relying heavily on its core strengths – good HR practices, talent management, ethics and transparency, depth and quality of the top management, and global competitiveness. Analysts also believe that while being a pure mobile operator can be limiting in terms of tapping various revenue sources, Vodafone has done well to focus on one business as against being stretched across nine different businesses.

Future prospects 

Going forward, the company is not averse to exploring different revenue streams. It is definitely looking to foray into the leased landline and business solutions space, where it will be competing with Bharti airtel, RCOM and TTSL. Though the operator would be a late entrant in this space, it has little choice in the matter. With retail user tariffs at less than one paise per second, the enterprise business still presents high margin data revenues for telecom operators.

The company is also planning to tap rural India in a big way as it is a huge potential market with an untapped population of over 700 million. Currently, the company is developing a profitable business model for these areas.

Vodafone also plans to unlock value by demerging its tower business and selling it off to an independent tower company this year. The company’s 7,000 telecom towers are valued at $1.2 billion. According to industry analysts, this move can help ease the debt burden, which has increased substantially after the 3G spectrum payout and the cash outflow resulting from the ongoing tax case.

In 2011, 3G will naturally be a major commitment for the company. Also, with the launch of 3G, the company expects services like internet access and movie downloads to trigger the use of advanced handsets with a bigger screen size and higher technological capability. In the coming years, the company plans to focus on high-end 3G handsets and gradually exit the ultra-low-cost segment. 

Overall, Vodafone will employ more of the strategies it has been using to pitch for higher revenues, more subscribers, higher VAS revenues and a strong brand value. Despite some grey areas, industry experts predict that five years from now, Vodafone Essar will continue to be a top-league player and hold its own in a highly competitive environment.

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